Iceland‘s Central Bank to pre-pay IMF loans

The Central Bank of Iceland has announced in a press release that it will prepay loans from the International Monetary Fund and the Nordic countries in the amount of ISK 116 billion.

The transaction represents the pre-payment of SDR 289 million (the equivalent of ISK 55.6 billion) to the IMF, and EUR 366 million (the equivalent of ISK 60.5 billion) to the Nordic countries.

According to the Central Bank, the pre-payment amounts to just over 20% of the funding from the IMF and the Nordic countries in connection with the IMF-led Stand-By Arrangement.

The March transaction is an element in paying down Iceland’s short-term debt, thus reducing the expense associated with the holding of the Central Bank’s foreign exchange reserves, without increasing re-financing risk or depleting the reserves.

According to the release, the decision to make the payment was made in view of the Treasury and the Central Bank’s relatively strong foreign currency liquidity position in the near-term. The repayment to the IMF covers maturities in 2013, and the payments to the Nordic countries cover maturities coming due in 2014 and 2015, as well as a portion of 2016.

The original loans from the IMF amounted to EUR 3.4 billion, or ISK 564 billion, at the current exchange rate. The pre-payment does not affect the Treasury’s net debt, but reduces Treasury’s gross debt by approximately 3.4% of Iceland’s GDP. Iceland’s external liabilities decline overall by about 6.6% of GDP as a result of these changes, but the net debt position is unchanged.

The Central Bank said in its release that the maturity profile of Treasury and Central Bank foreign debt shows clearly that the prepayment significantly reduces the burden of foreign debt service over the next four years, or until 2016.